I spent some time on Affirm over the weekend and didn’t come away with the impression it was showing strength.
Quick summary: I believe the high top line growth masks underlying weakness in the core business of facilitating transactions. This weakness is propped up by great performance in the trading side of the business.
Total Network Revenue
Revenue is broken down into 5 segments:
- Merchant Network Revenue
- Virtual Card Network Revenue
- Interest Income Revenue
- Gain/Loss on sale of loans
- Servicing Income Revenue (negligible)
Affirm calls the sum of the Merchant Network Rev and Virtual Card Network Rev, “Total Network Revenue”. This measures the fees Affirm earns for transactions and GMV that is processed through the Affirm platform. Along with consumer interest payments (to be discussed later), I view this as part of their core revenue.
Here are the numbers for Total Network Revenue ($M)
Year Q1 Q2 Q3 Q4 2019 24.7 41.5 38.2 35.9 2020 40.0 74.9 73.3 87.9 2021 99.2 110.5 111.8 107.9
Total Network Revenue Growth YoY
Year Q1 Q2 Q3 Q4 2019 2020 62% 81% 92% 145% 2021 148% 48% 53% 23%
Total Network Revenue Growth QoQ
Year Q1 Q2 Q3 Q4 2019 68% - 8% - 6% 2020 11% 87% - 2% 20% 2021 13% 11% 1% - 3%
We can see Total Network Revenue growth has been very weak for FY21. Even after considering that it was an unusual year in terms of seasonality, I felt their Q2’21 (Oct-Dec) performance was disappointing at 48% YoY and only 11% QoQ growth.
The interesting thing is that other metrics are not showing such precipitous slowdown in growth. In Q4’21, Active Consumers grew 97% YoY while GMV grew 106%. Yet Total Network Rev only grew 23%!! The only explanation I can think of is that Affirm negotiated high fees with its largest merchants.(Customer concentration: Peloton represented 28% of Affirm’s total rev for FY20 and their top 10 merchants represented 35% of FY20 rev.) Now that the growth of these top merchants are slowing, and as Affirm has to negotiate with smaller merchants, their take rate on each transaction has reduced.
Trading Revenue Saves the Day
Now in Q4’21, the poor growth in Total Network Revenue was made up by strength in other segments: “Interest Income” (grew 111% YoY in Q4 21) and “Gains on sale of loans” (grew 268% YoY in Q4 21)
At first glance, it looks great the interest income is growing well. But during the earnings call, the company said this “Interest income grew 111% to $104 million. However, it is important to note that 40% of the increase of interest income was driven by a 212% year-on-year increase in the amortization of the discount on loans held for investment on the balance sheet rather than from consumer interest payments. The portion of interest income related to consumer interest payments grew 77%”
In Q3’21, Interest Income also had a huge contribution (about one-third) from this item “amortization of the discount on loans held for investment on the balance sheet”
My understanding of “amortization of the discount on loans held for investment on the balance sheet” is that this is more trading in nature: gains (or losses) due to the discount/premium to market when buying loans to be held on Affirm’s balance sheet.
As with most trading gains/losses, my guess is the contribution from this and the revenue segment “Gains on sale of loans” is not ratable and can be volatile.
Overall, these are my conclusions:
- Core revenue of Total Network Revenue has not shown strength for the past 3 quarters, partly due to weakness during the holiday season and partly due to seasonality. Consumer interest income payments, also a core revenue, did alright at 77% growth YoY in Q4’21.
- The trading side of the business, which I view as secondary revenue, was doing the heavy lifting to give the overall impression that the business was doing well.
- The Shopify contributions are unlikely to have contributed to the Network Revenue in a meaningful way so far. When that happens, along with Amazon contribution, (we’ll likely see Network Rev grow strongly) I’d be more interested in taking a stake in the company.